Transcript Aggregate Demand and Aggregate Supply

#7
Aggregate Demand and Aggregate Supply
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Aggregate Demand
• Real GDP desired at each price level
• Inverse relationship
• Real balances effect
• Interest effect
• Foreign purchases effect
LO1
7-2
Price level
Aggregate Demand
AD
0
LO1
Real domestic output, GDP
7-3
Changes in Aggregate Demand
• Determinants of aggregate demand
• Change in consumer spending
• Change in investment spending
• Change in government spending
• Change in export spending
LO1
7-4
Price level
Changes in Aggregate Demand
AD2
AD3
AD1
0
Real domestic output, GDP
LO1
7-5
Consumer Spending
• Consumer wealth
• Household borrowing
• Consumer expectations
• Personal taxes
LO1
7-6
Investment Spending
• Real interest rates
• Expected returns
• Expectations about future business
conditions
• Technology
• Degree of excess capacity
• Business taxes
LO1
7-7
Investment Spending
LO1
7-8
Government Spending
• Government spending increases
• Aggregate demand increases (as
•
LO1
long as interest rates and tax rates
do not change)
• More transportation projects
Government spending decreases
• Aggregate demand decreases
• Less military spending
7-9
Net Export Spending
• National income abroad
• Exchange rates
• Dollar depreciation
• Dollar appreciation
LO1
7-10
Net Export Spending
LO1
7-11
Aggregate Supply
• Total real output produced at each
•
LO2
price level
Relationship depends on time horizon
• Immediate short run
• Short run
• Long run
7-12
AS: Immediate Short Run
Price level
Immediate-short-run
aggregate supply
P1
0
ASISR
Qf
Real domestic output, GDP
LO2
7-13
Aggregate Supply: Short Run
AS
Price level
Aggregate supply
(short run)
0
Qf
Real domestic output, GDP
LO2
7-14
Aggregate Supply: Long Run
Price level
ASLR
Long-run
aggregate
supply
0
Qf
Real domestic output, GDP
LO2
7-15
Changes in Aggregate Supply
• Determinants of aggregate supply
• Change in input prices
• Change in productivity
• Change in legal-institutional
•
•
LO2
environment
Collectively position the AS curve
Changes raise or lower per-unit
production costs
7-16
Changes in Aggregate Supply
AS3
AS1
Price level
AS2
0
Real domestic output, GDP
LO2
7-17
Input Prices
• Domestic resource prices
• Labor
• Capital
• Land
• Prices of imported resources
• Imported oil
• Exchange rates
LO2
7-18
Productivity
• Real output per unit of input
• Increases in productivity reduce
costs
• Decreases in productivity increase
costs
Productivity
=
Per-unit production cost
LO2
Total output
Total inputs
=
Total input cost
Total output
7-19
Legal-Institutional Environment
• Legal changes alter per-unit costs of
output
• Taxes and subsidies
• Extent of government regulation
LO2
7-20
Price level (index numbers)
Equilibrium
AS
100
a
92
b
AD
0
502
Real
Output
Demanded
(billions)
Price Level
(index
number)
Real
Output
Supplied
(billions)
$506
108
$513
508
104
512
510
100
510
512
96
507
514
92
502
510 514
Real domestic output, GDP
(billions of dollars)
LO3
7-21
AD Increases: Demand-Pull Inflation
Price level
AS
P2
P1
AD2
AD1
0
Qf
Q1 Q2
Real domestic output, GDP
LO4
7-22
Decreases in AS: Cost-Push Inflation
Price level
AS2
AS1
b
P2
P1
a
AD
0
Q1 Qf
Real domestic output, GDP
LO4
7-23
Downward Price-Level Inflexibility
• Prices are downwardly inflexible
• Fear of price wars
• Menu costs
• Wage contracts
• Efficiency wages
• Minimum wage law
LO4
7-24
Decreases in AD: Recession
Price level
AS
P1
P2
b
a
c
AD1
AD2
0
Q1 Q2 Qf
Real domestic output, GDP
LO4
7-25
The Multiplier Effect
• Shifts in AD embody an “initial
•
change” in spending
Price levels and average wage levels
are becoming more flexible downward
Change in real GDP
Multiplier =
LO4
Initial change in spending
7-26